It’s an old and familiar story. Insured asks agent for a quote. Agent gets a quote and presents it to insured. Insured finds a cheaper quote and tells agent to match that one. Agent gets cheaper policy for insured. Insured suffers an uninsured loss. Insured blames agent. This story replayed in North Dakota.
The insured was a property management company with an apartment building under construction. They asked a local agency to obtain builders risk insurance on the project. The agent obtained a quote from one carrier that included coverage for loss of rents and other soft costs.
However, the insured contacted another agency which got a quote for a less expensive policy from another carrier. This one did not include soft costs coverage. Nevertheless, the insured instructed the first agent to get the less expensive quote (the agent apparently also represented that carrier). The agent obtained the policy from the second carrier on terms identical to those the other agent quoted.
A fire damaged the construction site and delayed the apartment building’s opening by five months. The insured filed a claim under the builders risk policy, seeking payment for repair of the damage and lost rents. The carrier paid for the damage but not the rents, citing the absence of soft costs coverage under the policy.
The insured, of course, sued the agency, claiming that its producer was negligent because he did not offer an endorsement providing soft costs coverage. The agency said it had no obligation to offer the coverage because the insured did not ask for it. The trial court ruled in the agency’s favor, and the insured appealed.
North Dakota’s Supreme Court upheld the trial court’s ruling. The judge noted, “Generally, an insurance agent’s duty to the insured is to act in good faith and follow instructions.” The agent, he concluded, was “simply following” the insured’s instructions when he procured the policy.
The insured argued that the agent misstated the facts when he claimed that a soft costs endorsement was unavailable from the second carrier. This turned out not to be true; the parties later determined that the carrier did offer this endorsement. While acknowledging that the agent was mistaken, the judge found no evidence that he acted in bad faith.
Lastly, the judge found no evidence that a special relationship existed between the insured and the agent, which would have imposed a higher duty of care on the agent. Accordingly, he dismissed the lawsuit.
This lawsuit was probably an unavoidable part of doing business as an insurance agency. An insured who made the wrong decision looked for someone to blame, and that someone was the insurance agent. The agent did what the insured supposedly wanted. There was nothing else he could or should have done.
Fortunately, the court recognized that and ruled in the agent’s favor. The best thing other agencies can do when obtaining coverage is to document their steps and their communications with the insured. Careful procedures and thorough documentation are the keys to winning an errors and omissions lawsuit.